ANNUAL REPORT 2004 - BANCO SECURITY · 2012. 4. 19. · annual report 2004 5 chairman’s letter to shareholders I am pleased to present to you the Annual Report of Banco Security

ANNUAL REPORT

ANNUAL REPORT

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ANNUAL REPORT

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5

chairman’sletter to shareholders

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5chairman’s

letter to shareholders

I am pleased to present to you the Annual Report of Banco Security for

the year just ended.

The year 2004 was particularly notable for Banco Security. It began

with the purchase of Dresdner Bank Lateinamerika, Chile, which was

announced in April, formalized in June and completed in October.

This transaction was an important opportunity for Banco Security

as the similarities and differences between the two banks brought

significant enhancements to the performance of the merged bank.

A similar orientation of the businesses of both banks to large and

medium-sized companies provided important synergies in the

customer portfolio, offering them now a wider range of products.

A timely commercial strategy and an efficient operating program

enabled us to maintain the quality of service and retain the valuable

customer portfolio of Dresdner Bank, thus avoiding the usual loss or

market share generally seen following mergers. Quite to the contrary,

the merger of Banco Security and Dresdner Bank meant advancing

the Bank’s growth by two years, with an increase in market share

from 2.82% to 3.36% of total bank lending at September 30, 2004.

Also, having absorbed all the merger costs during 2004, the reduced

expenses of the merged bank should lead to important progress in

terms of efficiency. On the other hand, the valuable experience of

Dresdner Bank in matters like risk control and the Basle ratio, plus

some competitive advantages such as its modern foreign trade

operating systems have already been introduced into the merged

bank in order to further improve and broaden the quality and variety

of the services offered to our customers.

The results of Banco Security for 2004 were a net income of

US$ 25.05 million (Ch$14,024 million) which compares favorably with

the net income of US$ 24.40 million (Ch$13,659 million) in 2003,

especially considering that all the merger costs were absorbed during

2004. Total loans amounted to US$ 2.12 billion (Ch$1,188 billion) at

December 2004 which represents real growth of 20.5% for Banco

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Security and a real increase of 1.3% if compared with the loans of the

two banks separately a year ago, thus showing the almost nil loss of

loans during the merger process.

The objectives of maintaining the traditional characteristics of

Banco Security in terms of risk and efficiency also continue to be

present as, at the close of 2004, the Bank’s risk ratio was 1.52%

of the total loan portfolio and overdue loans represented 0.77%

of total loans. This placed Banco Security as one of the lowest risk

banks in the market. In examining the Bank’s efficiency, it should

be borne in mind that operating expenses in 2004 include all the

merger costs thus increasing to 59.5% of the operating margin for

just this year. These should reduce to below 50% in the coming

years in view of the cost savings and economies of scale following

the merger.

Reaffirming their commitment to Banco Security, its shareholders

decided to strengthen the Bank’s business base for the next few years

with a capital increase of US$ 26.79 million (Ch$15,000 million) in

December 2004.

I should also like to mention that one of the pillars of Banco

Security is and has been its people. It has historically had a top-

class team, both professionally and in human terms, and I venture

to say that our achievements are basically explained by this factor.

It is therefore no surprise but one of pride to inform you that

Banco Security was included in 2004, for the fourth consecutive

year, in the table of honor of the “25 best companies to work

for in Chile” and, this time, in 7th place. Along similar lines, a

survey of “The best companies for working mothers” made by

El Mercurio newspaper, Ya magazine and Fundación Chile Unido,

Banco Security was again chosen as being among the 5 companies

in Chile that provide the best facilities for working mothers, thus

promoting an optimum family-work relationship. Banco Security


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was also awarded the “Gran Premio Revista Capital”, work and the

family category, as the Chilean company which best reconciles

work and the family.

We are proud of the activities carried out during 2004, the results

obtained and the recognitions we have received. This imposes on

us and on all those working for the company, a great challenge with

respect to our customers, our shareholders and also the market, in

performing our work in an increasingly better way.

Francisco Silva S.

Chairman


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boardand management

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BOARD OF DIRECTORS

· Chairman: Francisco Silva S.

· Directors: Hernán Felipe Errázuriz C. Jorge Marín C. Gustavo Pavez R. Renato Peñafiel M. Gonzalo Ruiz U. Mario Weiffenbach O.

SENIOR MANAGEMENT

· President: Ramón Eluchans O.· Chief Assistant Executive Officer: Margarita Hepp K.· Senior Economist: Aldo Lema N.· Chief Commercial Officer: Christian Sinclair M.· Chief Investment and Finance Banking Officer: Bonifacio Bilbao H.· Chief Risk Management Officer: José Miguel Bulnes Z.· Chief Operations Officer: Arturo Kutscher H.· Corporate Banking and Branches Officer: Adolfo Tocornal R-T.· Middle Market and Real Estate Banking Officer: Alejandro Arteaga I.· Multinational Companies and Foreign Trade Officer: Mario Alfonso Piriz S.· Personal Banking and Mortgage Business Officer: Gonzalo Baraona B.· Leasing Area Officer: Ignacio Lecanda R.· International Area Officer: Claudio Izzo B.· Foreign Trade Officer: Miguel Angel Delpin A.· Local Currency Money Desk Officer: Sergio Bonilla B.· Performance and Electronic Businesses Officer: Marcial Letelier O.· Chief Administration Officer: Manuel José Balmaceda A.

boardand management

COMMERCIAL MANAGERS AND AGENTS

BRANCHES· Antofagasta Branch Manager: Guillermo Delgado G.· Concepción Branch Manager: Alberto Apel O.· Puerto Montt Branch Manager: Francisco Zañartu F.· Agustinas Branch Manager: Margarita Jarpa del S.· Temuco Branch Agent: Felipe Schacht R.· Ciudad Empresarial Branch Agent: Felipe Oliva L.· Head Office Branch Agent: Patricio Gutiérrez P.· La Dehesa and Vitacura Platform Head: José Pablo Jiménez U.· Private Banking Platform Head Constanza Pulgar G.

BUSINESS PLATFORM· Corporate Businesses Assistant Manager: Sebastián Covarrubias F.· Multinational Companies Assistant Manager: Erik Möller R.· Large Companies Assistant Manager: René Melo B.· Businesses Assistant Manager: Humberto Grattini F.· Businesses Assistant Manager: Hernán Besa D.· Businesses Assistant Manager: Jorge Contreras W.· Businesses Assistant Manager: José Luis Correa L.· Personal Banking Assistant Manager: Juan Carlos Ruiz V.· Businesses Assistant Manager: Mauricio Parra L.· Multinational Companies Agent: Juan Pablo Tolosa C.· Real Estate Area Agent: Francisco Domeyko C.

INVESTMENT PLATFORM· Money Desk Assistant Manager: Ricardo Turner O.

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historical summary

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1 9 8 1Banco Urquijo de Chile is formed in August, a subsidiary of Banco Urquijo España.

1 9 8 7Security Pacific Corporation, a subsidiary of Security Pacific National Bank, Los

Angeles, California, acquires all the shares of Banco Urquijo de Chile whose name

is changed to Banco Security Pacific. The same year, Security Pacific National Bank

forms a securities trading and stock-broking firm which in 1991 is sold to Banco

Security. It is today called Valores Security, Corredores de Bolsa.

1 9 9 0A leasing subsidiary, Leasing Security, is formed.

1 9 9 1In June 1991, Security Pacific Overseas Corporation sells 60% of the bank to the

present controlling shareholders of Grupo Security and its name is changed to

Banco Security.

1 9 9 2Administradora de Fondos Mutuos Security (a mutual funds management

company) is formed as a subsidiary of Banco Security.

1 9 9 4Bank of America, the successor of Security Pacific National Bank, sells to Grupo

Security the remaining 40% of Banco Security.

2 0 0 1In April, the subsidiary Leasing Security is incorporated as a business unit into

Banco Security.

2 0 0 3In September, the subsidiary Administradora de Fondos Mutuos Security S.A.

widens its objects and changes its name to Administradora General de Fondos

Security S.A.

2 0 0 4In June, Grupo Security acquires 99.67% of Dresdner Bank Lateinamerika, Chile,

and merges this with Banco Security on October 1, 2004.

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strategy

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DESCRIPTION

Within an industry characterized in recent times for its

rapid concentration which has led to the predominance of

large banks, Banco Security has continued to stand out as

a medium-sized bank operating in a clearly-defined niche

with an excellent level of service, controlled risks, high

productivity and good technological support.

Banco Security’s strategy consists of offering personalized,

integral, competitive and timely solutions for the financial

needs of large and medium-sized companies, and of

high-income individuals, providing them with a service

of excellence that enables it to maintain a long-term

relationship. The Bank therefore has a complete range

of financial products and services backed by first-class

technology in all its channels and the necessary support

for providing full satisfaction for its customers. The

pillars of the competitive strategy of Banco Security are

therefore:

• To maintain and improve the high standard of service.

This is a constant concern for the Bank as it is the

principal attribute for maintaining its customers over the

long term and the clearest argument for attracting new

ones.

• To increase its customer base within the objective

segment. This has been an invariable objective in the

Bank’s business areas and it was within this line that

the Chilean subsidiary of Dresdner Bank was acquired by

Grupo Security and subsequently merged.

• To expand the range of financial products and services.

While it is not the Bank’s strategy to be the pioneer in

the development and launching of new products, it is

nevertheless its strategy to remain up-to-date in the

provision of the products and services that the rest of

the banks operating in Chile offer. In addition, there is

strategy

the Bank’s ability to adapt its products and services to

the specific requirements of each customer.

• To increase the penetration of its products and

services among its customers. Based on the high quality

of service offered by the Bank, one of the objectives of

the commercial efforts is to persuade customers to

increase the variety of products and services they use, as

well as the volume of financial transactions they channel

through the Bank.

• To continue increasing efficiency in the use of the

Bank’s resources. Banco Security aspires to having

the special flexibility of a small bank coupled with

the efficiency of a large bank. Substantial progress

has already been made through the centralization

of the human resources, information technology,

communications, accounting and audit areas of all the

companies of Grupo Security. On the other hand, Banco

Security has continued with its policy of outsourcing

everything that an external entity is capable of doing

more efficiently than the Bank.

MAIN STRENGTHS

Banco Security has been developing a series of strengths

that have enabled it to maintain its competitiveness and

a proper level of profitability. Some of these strengths

are:

• High degree of stability in operating flows and

profitability. Banco Security is the bank in Chile with

the greatest stability in terms of return on equity. This

is basically explained by its low level of credit risk and

by the fact that an important part of its revenues is

generated by its traditional banking business and not

from trading, which by its nature is highly unstable.

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• Excellent service quality image. The Bank is recognized

by its customers in its objective segment and by its

competitors as one that offers the highest quality of

service in the market. The Security brand, according to

market surveys, is associated with not only high levels of

service quality but also for its agility in attention and a

high level of trust, attributes widely valued by the market

on which the bank is focused.

• Directors and senior management have relevant

shareholdings. This is a guarantee of management’s

commitment to results and a correct structure of

incentives.

• Great human capital and excellent working

environment. One of the Bank’s principal assets is its

human team and the excellent working climate it has

achieved. This reflects the institutional values and is the

result of a proper human resources plan implemented

with perseverance over the years. A direct result of this is

that the Bank has been among the 25 best companies to

work for in Chile ever since Great Place to Work Institute

began to prepare this ranking in Chile, attaining 7th place

in 2004.

• High degree of efficiency. Banco Security has shown

very good levels of efficiency compared to the sector

throughout its history. This is because of the constant

effort to achieve a proper use of resources and a high

level of productivity (it is the bank in Chile with the

highest level of loans per employee).

• Broad know-how of the financial system. Partners,

directors and management have a vast experience in

the financial business, averaging more than 15 years

experience in banking and related institutions. Their

permanence in this business has enabled them to develop

a great capacity to respond correctly to the needs of its

objective market and to identify the main trends in the

Chilean financial industry.

• Evident capacity to grow faster than the market. Over

the period 1994-2004, the average annual growth in

the loans of Banco Security was 11.6% while the sector

grew by 6.7%, expanding at an average of 1.73 times the

sector’s growth rate.

strategy

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COMMERCIAL STRUCTURE

In order to best exploit its strengths and carry out the

above strategy, the Bank in 2004 made some adjustments

to its commercial structure as follows:

• Corporate Banking represented around 83% of the

Bank’s loans and 58% of operating revenues at the end

of 2004. This comprises the following areas:

a.- Corporate Banking and Branches: specializes

in meeting the financial needs of companies whose

annual sales exceed US$ 26.79 million (Ch$15,000

million) and who typically require highly-specialized

• Prudent risk management. The Bank has been noted

historically for maintaining a low-risk loan portfolio for

which it has a first-class risk management system. It has

also been introducing new elements for managing market

and operating risks in order to meet the requirements set

out in the Basle II Agreement.

strategy

financial products and services. This management is also

responsible for ensuring proper attention for regional

customers distributed among the Bank’s present 4

regional branches in Antofagasta, Concepción, Temuco

and Puerto Montt.

b.- Multinational Companies and Foreign Trade: this

manages an important part of the portfolio of European

and multinational customers introduced to the Bank

through the merger with Dresdner Bank. Advantage was

taken of the know-how of that bank’s business platform

in order to attend the specific needs of this customer

category with the standard of service that characterizes

the Bank.

c.- Middle Market and Real Estate: this management

seeks to provide special attention to the financial

requirements of the middle/large-sized companies

having sales of between US$ 2.68 million (Ch$1,500

million) and US$ 26.79 million (Ch$15,000 million).

Given this segment’s high growth potential, the

objective is to offer the best service in the market and

thus attract new customers and intensify relationships

with them.

• Personal Banking, oriented on attracting and attending

the demanding needs of high-income individuals. This

area currently represents around 17% of the Bank’s total

loans and 18% of its operating revenues. This area is

structured as follows:

a.- Preferential Banking and Private Banking: specializes

in attending high-income individuals requiring an

optimum quality of service.

b.- Mortgage Business: concentrates on attracting and

attending high-income individuals who need mortgage

finance.

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• Investment Banking is an area of great importance in

the Bank’s business strategy, complementing the service

provided by the commercial areas. It makes a large

contribution to the results, reaching close to 24% of the

bank’s operating revenues in 2004. This area includes:

a.- Money Desk which actively trades in foreign

exchange and financial instruments in both the domestic

and international markets, and manages the Bank’s

exposures in currencies, maturities and interest rates.

The area therefore is split into the Trading Desk, Positions

Desk and Distribution Desk.

b.- International Management, dedicated to exploring

the external financial markets and seeking funding for

the bank’s foreign trade business in which Banco Security

significantly increased its share following the merger

with Dresdner Bank.

STRATEGIC HIGHLIGHTS OF 2004: MERGER WITH

DRESDNER BANK LATEINAMERIKA, CHILE

In June 2004, Grupo Security acquired 100% of the

partnership rights in Inversiones DBLA Limitada, an entity

that controlled approximately 88.3% of Dresdner Bank

Lateinamerika, Chile and 100% of Dresdner Lateinamerika

S.A. Corredores de Bolsa. This transaction also

contemplated, in accordance with the law, the making of a

public offering for acquiring the remaining shareholdings in

Dresdner Bank, through which it acquired a further 11.4%

of its share capital. Later, on October 1, 2004, the Dresdner

and Security banks were merged.

Dresdner Bank has a business focus very similar to that of

Banco Security, concentrating heavily on the segment of

commercial loans to medium to large-sized companies,

thus generating important potential for operating

synergies. Dresdner Bank also offered very attractive

characteristics and strengths to Banco Security like know-

how in the foreign trade business and exchange hedging,

its proximity to certain foreign communities resident in

Chile, a highly-specialized staff and advanced systems in

certain areas.

The purchase of Dresdner Bank and its later merger

with Banco Security thus fits within the strategy of

growth with controlled risk. Dresdner Bank’s loans of

US$ 0.36 billion (Ch$199 billion) at September 2004 were

equivalent to advancing the Banco Security growth by

about 2 years, and made it the eighth largest bank (sixth

among those with Chilean capital) with a market share of

around 3.4%.

In analyzing the purchase, it was estimated that the merger

of the two banks would generate savings of approximately

50% of the operating expenses of Dresdner Bank. Having

completed the merger, the results indicate that the savings

are around 60% of those expenses.

strategy

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strategy

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country, industryand banco security 2004

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19country, industry

and banco security 2004

ECONOMIC SCENARIO

GENERAL PERSPECTIVE

Chile returned to an expansive economic cycle during

2004, leaving behind six years of slow growth and

deteriorating confidence in the market place. Within

a broadly favorable international context, the country

reaped the benefits of preserving a healthy and strong

economic structure characterized fundamentally for

its considerable commercial and financial opening

up, stable political institutions, fiscal solvency and

the strength of the banking system. Economic growth

moved from less to more during the year, stimulated

also by the sharp fall in local interest rates influenced

by benign inflation rates and the low cost of external

financing.

EXCEPCIONAL EXTERNAL ENVIRONMENT

The international environment faced by Chile during 2004

can be considered as one of the most favorable seen in

the last thirty years. Firstly, global growth returned to

above its historical average, even reaching one of the

highest rates in two decades. Expansion was robust and

at the same time generalized. USA, with a growth rate of

around 4.5%, and the Asian countries, with an expansion

of 7.6% led by China, made the largest contributions to this

expansive cycle. Latin America and Japan showed their best

performance in 4 years, with growth rates of 5.4% and 3%

respectively.

The second factor that benefited Chile and other

emerging economies was the intensification of the global

weakening of the US dollar which began in February 2002.

While the dollar appreciated moderately in the second

quarter, partly due to an overreaction in expectations of

FED interest rate adjustments, it reverted in June to its

downward trend, affected by the worsening of imbalances

in the USA and the absence of clear indications for their

correction. The dollar-euro exchange rate graph clearly

shows this process. The euro appreciated from its record

low in 2002 (US$ 0.85) to US$ 1.29 in February 2004;

it then fell to USS$ 1.17 in May, before returning to its

strengthening path and reaching US$ 1.36 by the year

end. This movement acted as a brake on the European

export sector which, in the context of weak domestic

demand, limited economic growth of the zone to rates

of below 2%.��

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Thirdly, the stronger global economy generated a large

increase in volumes exported which, together with

the weak dollar, led to a recovery in export prices.

The average copper price was US$ 1.3 per pound in

circumstances when, at the start of the year, price

projections were around one dollar. Non-copper export

prices showed an increase of around 16% over 2003.

Despite oil prices rising almost US$ 10 (in annual

average terms) from US$ 28 to US$ 38 a barrel, the

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21country

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terms of trade showed an increase of 21% during 2004.

The country therefore received incremental income of

almost US$ 5,500 million (5.5% of GDP) compared to

a normal year.

Lastly, all the above took place in broadly favorable

financial conditions for emerging countries despite

the start of the monetary normalization process by

the FED. With its decision to gradually and moderately

increase the federal funds rate, long-term rates, which

rose strongly prior to entering the second quarter

due to the initial uncertainty about the interest-

rate adjustment process, returned to within the 4%

- 4.5% range during that quarter. At the same time,

sovereign risk spreads fell sharply. This improvement in

macroeconomic and financial conditions reintroduced

pressures for revaluing the Chilean peso and other

regional currencies, a process that was temporarily

interrupted by the appreciation of the dollar and the

rise in FED interest rates. As a result, gross capital

flows recovered their dynamism with the prices of

the main market and debt instruments appreciating.

The Chilean sovereign risk thus declined from 90 basis

points to close to 70 basis points, supported by the

positive market contagion, improved macroeconomic

prospects, the differentiating signs resulting from the

trade agreements and the maintenance of an orderly

and responsible fiscal policy. The combination of

low international interest rates and further falls in

sovereign-risk spreads led the cost of external financing

to record low levels.

DYNAMIC DOMESTIC SCENARIO

The combination of a broadly positive external

environment and very favorable domestic financial

conditions strengthened the Chilean economy’s

expansive cycle. Economic growth accelerated from

4% at the end of 2003 to more than 7% at the end

of 2004, the highest rate since 1997. As a result, GDP

grew by slightly below 6% which, in per capita terms,

indicates a return to levels close to US$ 6,000, thus

reaffirming the country’s regional leadership position.

For the first half of the year, exports were the growth

motor, reflecting the forces of external demand and

the improved terms of trade. Total exports increased

by more than 50% to a record level of US$ 32 billion,

favored by the 60% improvement in copper prices and

the strong increase in volumes shipped of copper (17%)

and the rest (11%).

Starting in the second half, the expansion became

more balanced, with greater dynamism in domestic

spending, especially in capital expenditure. From July

onward, investment grew at rates of close to 15%

which produced an average for the year of over 11%

which corresponds to over 24% of GDP. While this

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21country

performance was led by strong growth in purchases of

imported machinery and equipment, construction also

made a healthy contribution. All of this is sustained

on positive economic prospects and on the expansive

nature of credit conditions.

Private consumption, for its part, was relatively stable

during the year, with average expansion slightly below that

of domestic product.

By sectors, the growth was relatively balanced between

tradable and no-tradable items. While the former were

strongly influenced by the favorable external scenario,

the latter received the stimulus of the acceleration noted

in domestic demand in the second half. Notable was the

growth in fishing (23.2%), manufacturing (7.3%), retail

(7.3%), mining (6.2%) and, since mid year, construction

(over 8% in that period).

For the second year running, the financial sector showed

high levels of activity, with significant growth in bank

lending, a large increase in the volumes traded on the stock

market and a strong recovery in funds managed on behalf

of third parties.

Improved expectations and the maintenance of historically-

low interest rates led to a 10% real increase in bank

lending. While consumer and mortgage loans maintained

dynamic growth, with growth rates of 17.3% and 18.9%

respectively, the recovery in investment reactivated

commercial loans (6.2%).

Despite the strong increase in spending and product,

unemployment remained systematically above the

levels seen in 2003, averaging 8.8% during the year.

This reflected sluggish growth in employment in the

first half, although improving toward the end of the

year, which was insufficient to offset the increase in

the workforce’s participation rate. The latter however

is indicative of more promising expectations in the

population.

Fiscal policy management remained guided by the 1%

structural surplus rule for the general government. As

a result, the increase in tax collections resulting from

accelerated economic growth and the higher copper prices

produced a fiscal surplus of around 2% of GDP. Despite the

greater dynamism in investment, this public sector increase

resulted, in a context of stability in private sector savings,

in the current account of the balance of payments moving

from a deficit of 0.8% of GDP in 2003 to a surplus of 2%

of GDP in 2004. This strength in the external accounts

does no more than reflect compliance with this rule, which

requires that above-normal surpluses should be saved. This

marks a clear difference compared to Chile’s performance

in past decades.

Inflation during 2004 was again volatile, reflecting the

exchange rate and international fuel prices. The threat

of deflation in late 2003, shown in a 12-month change

in CPI of –0.7% at March, was quickly dissipated once

the Central Bank reduced the monetary policy reference

interest rate by 100 basis points between December and

January, to a level of 1.75%. This decision, linked to the

spurt in oil prices (from US$ 33 p/b in March to over

US$ 50 p/b in October), helped to realign the 12-month

CPI rate to within the target range (between 2% and 4%),

closing the year at 2.4%. The rise in the rate of underlying

inflation however was less pronounced, basically the

result of the absorbing role of the peso appreciation, the

fall in unit labor costs and the moderate decompression

in margins. The CPIX, which eliminates fruit, vegetables

and fuels, and the CPIX1, which also excludes regulated

public-utility tariffs and other volatile prices, ended 2004

below the floor of the target range, at levels of 1.8% and

1% respectively.

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23country

This moderate rebound in underlying inflation allowed

the Central Bank to start reducing the monetary

stimulus only toward the end of the third quarter once

the growth in domestic demand was consolidated, and

the slack began to be taken up quickly. The monetary

normalization cycle began gradually and cautiously so

the reference interest rate closed the year at a similar

level to that which it had begun (2.25%). This had

no major impact on nominal long-term rates which,

although with sharp fluctuations related to changes in

expectations about Central Bank rate adjustments and

short-term inflation, also closed the year with little

change compared to December 2003 (slightly below

5% in the case of “BCP5” securities). Long-term rates

in UF, for their part, fell by more than a percentage

point between December and August, to later show a

slight recovery in the last quarter. Specifically, “BCU 5”

securities moved from 3.3% to a record low of 1.8%, and

closed at around 2.7%.

CONCLUSION

For economic historians, the year 2004 will be remembered

for an exceptionally favorable external scenario, a significant

recovery in consumer and business confidence, the joint

reactivation of spending and product, improved labor

conditions (despite the moderate rise in unemployment),

higher investment, fiscal and external account surpluses

and controlled inflation. The consolidation of the external

market-oriented economic model and a high degree

of credibility in the institutions and economic policies,

particularly fiscal and monetary policies, could maintain

these trends in 2005.

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23country

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25industry

ANALYSIS OF THE INDUSTRY

The Chilean banking industry at the close of 2004

comprises 26 financial institutions of which 20 are banks

established in the country (including 6 controlled by foreign

shareholders and 1 by the state) and 6 corresponding to

foreign bank branches. Total loans at that date amounted

to US$ 67.58 billion (Ch$37,833 billion) and financial

investments to US$ 16.64 billion (Ch$9,316 billion), while

aggregate earnings for the year were US$ 1,188.17 million

(Ch$665,176 million). This represents real 12-month growth

of 4.4% and an annualized return on equity of 16.8%.

The Chilean banking system is well advanced, measured

as a function of the bank-use index, defined as the ratio

of total loans to GDP, which reached 67.5% in 2003

(51% in 1991). Chile therefore shows the highest level of

development among Latin American countries but still has

important potential if compared to the level reached in the

most developed economies like USA (142.2%) and the Euro

zone (109.2%).

TRENDS

One of the main trends observed in the banking industry

in recent years has been the growing concentration

of total loans in a smaller number of banks. This has

been the result of a marked process of consolidation,

basically motivated by rationalization of costs and greater

competition within the industry. For example, in 1994

there were 4 principal banks which represented 44.7% of

total loans, whereas at December 2004, these represented

65.7% of total loans. During 2002, the Superintendency

of Banks and Financial Institutions (SBIF) authorized the

mergers of Banco de Chile with Banco de A. Edwards, and

Banco Santander with Banco Santiago, thus producing the

largest banks in the sector. Later, in May 2003, Banco del

Desarrollo acquired Banco Sudameris and, in November

that year, Banco de Crédito e Inversiones acquired Banco

Conosur. Lastly, in June 2004, Grupo Security acquired

Dresdner Bank Lateinamerika and then merged it with

Banco Security.

Despite the trend to greater concentration, there have also

been new entrants into the sector. New banks have been

formed to meet the financing needs of specific market

niches. In recent years, the SBIF has granted seven new

banking licenses, being Deutsche Bank, Banco HNS, Banco

Ripley, Banco Monex, Banco Conosur, Banco Paris and

Banco Penta.

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25

The strong growth in loans has been accompanied by a

fall in the levels of credit risk. For example, the ratio of

allowances for loan losses to total loans reached 1.99%

at December 2004, compared to 4.72% at December

1990, and the ratio of overdue loans to total loans

was 1.20% at December 2004 compared to 2.10% at

December 1990. The following graph shows that the

system is gradually returning to the risk levels prior to

the economic crisis affecting the country between 1998

and 2003.

Another of the relevant trends refers to the entry of

new competitors to the banking business, principally by

insurance companies and retail stores which currently

offer credit cards, consumer loans, mortgage loans, etc.

In November 2003, for example, Almacenes Paris acquired

the Consumer Loans Division of Banco Santander Santiago,

“Santiago Express”, in order to support the growth of the

future Banco Paris. Another example is the impulse that

Distribución y Servicio D&S S.A. is giving to its “Presto”

credit card for supporting its financial business, directed

principally to the more mass sectors of the population. In

July 2004, D&S signed an agreement with Banco Estado

that contemplates, among other things, access by all

holders of the Presto card to the bank’s automatic teller

machines and mortgage loans.

LOANS

The system’s total loans have shown sustained growth

since 1990, mainly explained by the country’s economic

growth and the stability of the domestic banking system,

principal factors for this industry’s growth worldwide. The

annual growth rate for loans during the period 1990 – 2004

was a real 8.1% while annual GDP growth in the same

period is estimated to be about a real 6.0%.

Analyzing in detail the performance of loans during

2004, the most important growth rates relate to

housing loans (18.9%), consumer loans (17.3%) and

foreign trade financing (14.1%). The first two are the

direct consequence of the reactivation in consumption

as a result of people’s better economic conditions and

expectations, and, in the case of foreign trade financing,

the increased trade with countries with which free trade

agreements have been signed.

industry

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27industry

The sector’s average efficiency has continued to

progress well. According to the latest information

published by the SBIF, the efficiency ratio (operating

expenses to gross operating margin) for 2004 was

53.5% which compares favorably with 53.8% the

previous year. As already mentioned, the main

explanation for this is the process of concentration

of loans in just a few large banks which has generated

considerable economies of scale.

REGULATORY FRAMEWORK

The Chilean banking system is regulated and supervised

by the Central Bank of Chile and the Superintendency

of Banks and Financial Institutions (SBIF). These

institutions ensure compliance with sector regulations

as contained in Constitutional Law of the Central Bank

of Chile, the General Banking Law, the Corporations Law

No.18,046 and the Corporations Regulations, to the

extent that the latter complement the Banking Law.

The regulatory framework has permitted the sector’s

positive development in recent years in terms of growth,

risk control and competition, and is considered today

to be one of the most stable and transparent in Latin

America.

Under the banking law, the SBIF is responsible for supervising

and controlling the banking industry and has to interpret

the sector regulations, evaluate the granting of banking

licenses and monitor the performance of the banks. Banks

have to send to the SBIF monthly complete information

about their operations and their financial statements

and, annually, their audited financial statements. The

SBIF’s powers include requests for additional information

when required, proposing corrective actions, imposing

sanctions and, in extreme cases, appointing a provisional

administrator.

RESULTS

Results for the year 2004 were excellent for banks in general

as they again reached record levels with a return of 16.8%,

the industry consolidating its position as one of the most

stable and profitable sectors in the economy. The industry’s

aggregate net income was US$ 1.19 billion (Ch$665 billion),

representing 4.4% real growth over the year before. 66.2%

of this figure was generated by the 3 largest private-sector

banks, which in turn account for 52.4% of the sector’s total

loans. The difference between these percentages is largely

due to the greater efficiency achieved by these 3 banks

compared to the industry average.

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RESULTS

In comparing the results for 2004 with the previous

year, it is important to bear in mind that a series of costs

associated with the merger with Dresdner Bank (severance

payments, provisions, write-offs, etc.), amounting to

approximately US$ 8.93 million (Ch$5,000 million), were

a one-off charge to income.

The Bank has a market share of 3.14% of total bank loans

at December 31, 2004, occupying 8th place among the 26

banks operating in the local market.

Regarding the composition of the loan portfolio, the most

notable feature in 2004 was the increase in the relative

PERFORMANCE OF BANCO SECURITY IN 2004

LOANS

In analyzing the changes in the Bank’s loans during 2004,

it is important to remember that it was merged with

Dresdner Bank in October, whose loan portfolio at that date

amounted to US$ 355,65 million (Ch$199,104 million).

The Bank’s total loans at December 31, 2004 amounted to

US$ 2,121.37 million (Ch$1,187,606 million), showing real

growth of 20.5% in the year. When compared to the total

loans at the end of 2003 of Banco Security and Dresdner

Bank, the real growth amounted to 1.3%. Recalling

what happened in other bank mergers which resulted in

large losses of portfolio, it can be said that it is a great

achievement to have closed the year 2004 with more loans

than the sum of both banks at the end of the previous year.

In fact, this was the objective set in taking the decision to

purchase Dresdner Bank.

importance of foreign trade financing as a result of the

inclusion of the portfolio of Dresdner Bank (representing

10.8% of the Bank’s lending) and growth in loans to

individuals above the growth rate for the Bank’s total loans.

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29banco security

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The following were the most notable effects on the

operating margin:

• Strong growth in the net result of trading and exchange

gains which together represented 13.8% of income

before expenses.

• Net commission income grew by a real 32.6% to reach

9.8% of the operating margin (9.0% the year before).

The efforts in this respect made in recent years has

enabled the Bank to treble revenues from this source

and gradually close the gap with the sector average

(around 18% of the operating margin), but the Bank still

has plenty of scope for further increasing its commission

income.

Operating expenses showed strong growth, basically

explained by the merger with Dresdner Bank. As

mentioned above, it is important to bear in mind that the

figures for 2004 included the normal operating expenses

of Dresdner Bank and, additionally, the merger itself

generated a series of one-off costs. What is important

is that the efficiency ratio (operating expenses to

operating margin) was 49.5% in September 2004 (prior

to the merger), maintaining the positive trend shown in

recent years and below the sector average of 52.0% at

that date. This trend will be strengthened from 2005

onward as a result of the cost savings and greater

economies of scale resulting from the merger with

Dresdner Bank and the Bank’s efforts will continue in

this direction in order to maintain its competitiveness in

the face of the larger banks.

The consolidated income of the Bank and its subsidiaries

was US$ 25.05 million (Ch$14,024 million), including the

merger-related costs, thus exceeding the result for 2003.

The return on capital and reserves was 11.3%, below the

level of previous years because of the merger costs and

the capital increases made at the time of the merger of

US$ 47.81 million (Ch$26,766 million) and in December

of US$ 26.79 million (Ch$15,000 million). Extracting

these effects, the estimated return on equity reaches

around 18%, with which the Bank would have occupied

6th place in the sector’s profitability ranking. This notable

performance is largely explained by the results obtained

from the management of positions and growth in the

personal banking area. Corporate banking, for its part,

achieved considerable progress in diversifying its sources

of income in order to offset the fall in spreads in the last

few years.

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Banco Security held its market leadership in terms of

productivity in 2004, measured as loans to number of

employees, reaching an average of almost US$ 6.07

million (Ch$3,400 million) in loans for each of its 351

employees at December 31, 2004, a higher figure than

the year before.

banco security

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With respect to credit risk, Banco Security continued to

be among the banks with the lowest risk in the sector. At

December 31, 2004, the overdue portfolio represented just

0.77% of total loans (0.94% in 2003) and is covered 203%

by loan loss allowances at that date. However, it should be

noted that the Bank reported an important increase in its

losses for risk (allowances plus write-offs) which is basically

explained by the extraordinary allowances made at the

time of the merger in adjusting the portfolio of Dresdner

Bank to the risk standards of Banco Security.

The Bank’s solvency, measured by the Basle ratio (effective

equity to risk-weight assets) showed a strong improvement

during 2004 as a result of the merger with Dresdner

Bank, whose capital and reserves at September 30, 2004

amounted to US$ 47.81 million (Ch$26,766 million), and

the capital increase of US$ 26.79 million (Ch$15,000

million) made in December. The Bank’s capital and reserves

thus increased by around 50% in real terms and its Basle

ratio at the year-end resulted at 12.3% (against 11.2% in

2003). It is therefore in a very comfortable position with

respect to the 10% level demanded by local regulations for

classification as a first-category bank.

The results of the subsidiaries Valores Security Corredores

de Bolsa and Administradora General de Fondos Security,

as has been the case in recent years, made very important

contributions to the Bank’s results. The equity in income of

related companies amounted US$ 10.41 million (Ch$5,826

million), a 61.3% increase over the year before and

representing 41.5% of the Bank’s consolidated net income

(26.4% in 2003).

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31

subsidiaries

BANCO SECURITY ann

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DIRECTORS

· Chairman:

Ramón Eluchans O.

· Directors:

Bonifacio Bilbao H.

Javier Gómez C.

Enrique Menchaca O.

Luis Montalva R.

MANAGEMENT

· President:

Nicolás Ugarte B.

· Chief Operations Officer:

Juan Adell S.

· Investments Assistant Manager:

Cristián Pinto M.

Valores Security S.A., Corredores de Bolsa was formed

in 1987 by Security Pacific National Bank as a stock-

broking firm. It was sold to Banco Security in 1991 and

changed its name to its present one. With the passing of

time and mainly motivated by the fluctuations that have

characterized the Chilean stock market, the company

started to look for new business opportunities in order

to diversify its revenue sources. Now the stock trading

represents just 8.4% of its total revenues.

Valores Security currently divides its activities into two

business areas: fixed income and variable income. The first

relates mainly to managing the company’s own positions,

trading in financial securities, foreign exchange dealing and

US dollar futures contracts. Variable-income securities

transactions relate basically to the company’s original

business of stock broking.

subsidiaries

On October 1, 2004, Valores Security S.A. Corredores

de Bolsa was merged with Dresdner Lateinamerika S.A.

Corredores de Bolsa, the former absorbing all the latter’s

assets and liabilities.

During 2004, Valores Security S.A. Corredores de Bolsa

produced a net income of US$ 8.04 million (Ch$4,501

million), with a spectacular real 82.9% increase over

the year before. This result includes the net income

of US$ 0.57 million (Ch$320 million) of Dresdner

Lateinamerika S.A. Corredores de Bolsa between January

and September 2004. The return on equity for 2004

therefore reached 45.4% and its contribution to the net

income of Banco Security reached almost 30%.

VALORES SECURITY S. A., CORREDORES DE BOLSA

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In terms of share in the variable income market, the

company in 2004 achieved an average of 1.52% of the

trading volume on the Santiago Stock Exchange and

Chilean Electronic Exchange, on which it trades, which

compares favorably with the 1.14% achieved in 2003.

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ADMINISTRADORA GENERAL DE FONDOS SECURITY S.A.

subsidiaries

DIRECTORS

· Chairman:

Francisco Silva S.

· Directors:

Carlos Budge C.

Felipe Larraín M.

Renato Peñafiel M.

Gonzalo Ruiz U.

MANAGEMENT

· President:

Alfredo Reyes V.

· Chief Commercial Officer:

Juan Pablo Lira T.

· Investment Assistant Manager:

Rodrigo Fuenzalida B.

The mutual funds industry is highly competitive, with 19

participants in December 2004 of which 13 are subsidiaries

of or related to banks. The 4 largest firms manage 65.2%

of total funds.

2004 was a very dynamic year as, according to

preliminary figures at December 2004, the total funds

managed by the industry reached US$ 12,496.40 million

(Ch$6,995,859 million), with a total of 557,011 investors.

This represents real growth of 41.5% in terms of funds

managed and 31.5% in terms of number of investors.

These excellent industry results were mainly due to the

good performance of the stock market and improved

economic prospects.

Administradora General de Fondos Security S.A. was

formed in 1992 as a mutual funds management company

and a subsidiary of Banco Security; its business was

broadened in September 2003 and its name changed to

its present one. From the start, it has grown consistently

in terms of number of funds managed, assets managed and

number of investors. By the close of 2004, funds managed

were US$ 525.61 million (Ch$294,250 million), with real

growth of 51.2% and a market share of 4.25%; the number

of investors reached 11,781, i.e. 12.7% more than the year

before.

The funds themselves and assets managed at December

31, 2004 were:

• “Security Check”, a short-term fixed-income fund

focused on medium and large-sized companies, with

an equity of US$ 53.24 million (Ch$29,806 million) at

December 31, 2004,

• “Security First”, a medium and long-term fixed-income

fund, with an equity of US$ 59.53 million (Ch$33,325

million) at December 31, 2004,

• “Security Premium”, a sho

Documents

ANNUAL REPORT 2004 - BANCO SECURITY · 2012. 4. 19. · annual report 2004 5 chairman’s letter to shareholders I am pleased to present to you the Annual Report of Banco Security